CIA Annual Meeting Assemblée annuelle de l’ICA June 29 & 30, 2006 Ÿ Les 29 et 30 juin 2006 Ottawa, Ontario Session GEN-6

Update from ALM / Market risk working group Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Agenda Scope and composition of group Timeline, priorities and approach Technical issues Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Membership of group Mike White Wally Bridel Stephanie Fadous Charles Gilbert Ron Harasym Andrew Norville Christian-Marc Panneton Sylvain St Georges Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Scope Methodology to replace “Changes in interest rate environment (C3)” MCCSR component includes impact of non-fixed income assets supporting liabilities current phase excludes seg fund guarantees allow for correlation and diversification Analysis of sensitivities 1 year vs run-off real world vs risk neutral new approach vs existing MCCSR Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Scope Implementation issues (working with Modelling Standards group) use of approximations comparability of results Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Timeline “More complex issues” includes: correlations across products policyholder behaviour asset side features (prepayments etc.) Define methodology Q2-Q3 2006 Simple initial modelling Q3-Q4 2006 Pilot studies 2007 More complex issues non NA products implementation issues and approximations Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Issues faced so far Terminal value methodology real world vs risk neutral PADs or no PADs Interactions between market movements and insurance cashflows Run-times Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Risk neutral Uses current market prices No arbitrage Actuarial assumptions at best estimate ...adjust for risk to the extent that not diversifiable Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Real world Uses judgement and historical experience Possibility for arbitrage All risks merit a risk premium Margins for risk are calibrated for consistency Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Comparison Risk neutral objective (....sort of) consistent with banking definitions some international approaches use this method consistent with market cost to close out risk non-market risks? Real world subjective? consistent with existing practices consistent with cost of continuing to run risk need to have a margin for prudence – how? works well for non-market risks Session GEN-6

Update from Modelling Standards Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Membership of group Bill Beatty Ron Harasym Trevor Howes Jean-Guy Lapointe Robin Li Sylvain St.-Georges Stuart Wason Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Objective Best practices for internal capital models to ensure: Accuracy: Each risk is accurately reflected. Comparability: Between companies. Consistency: Between valuation dates and risks. Transparency: Including capabilities and limitations. Reliability: Robust process of generating capital results. Practicality: Recognizing cost and time constraints and appropriate trade-offs between theoretical accuracy and materiality. Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Need for Capital Model Guidance Capital models have some unique issues: Tail Considerations: Models that work well around the expected may be inadequate at estimating losses under extreme events. How to calibrate the tail to a 1 in 200 year event? What management action assumptions are appropriate? Do correlations increase in the tail? Practical Implementation: Theoretical framework is stochastic upon stochastic which generally will not be achievable. Risk Aggregation: Reflection of diversification benefits. Paper will not provide solutions to these issues per se, but rather highlight them and discuss ways to ensure a chosen approach is appropriate. Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Scope Best practices paper only, standards and regulatory guidance notes may follow. Includes Model Design Model Implementation Governance Reporting Excludes Risk based capital principles Methodologies Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Timetable First Draft: End of summer Final Base Document: End of 2006 Risk Specific Appendix on ALM/Mismatch Risk: Q107 Session GEN-6

CIA Annual Meeting Ÿ Assemblée annuelle de l’ICA Issues Faced So Far To what extent should Advanced Methods be standardized? Should capital be based on the company’s risk profile at the valuation date, or include anticipated changes in risk profile? What minimum requirements should be met before a company adopts an advanced method? Session GEN-6